09 - CHAPTER 9 UNDERSTANDING THE ISSUES 1 The fair value of...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 9 UNDERSTANDING THE ISSUES 1. The fair value of the net assets reflects the ap- preciation and/or depreciation in the value of existing net assets and the value of net assets not presently recognized on the balance sheet of the existing partnership. The bonus method is conservative in that it does not recognize the appreciation of existing assets or the value of unrecognized assets. The underlying logic for this position is based on several factors. First, the suggested appreciation is difficult to object- ively measure if not all the respective asset’s value has been realized through an arm’s- length transaction. For example, if you sell a 20% interest in a partnership, should that 20% transaction serve as the basis for suggesting the value of a 100% interest in the partnership? Second, the bonus method adheres to the long- standing convention of historical cost. There- fore, any value suggested but not actually received as consideration is not part of the his- torical cost of the transaction. Third, if unreal- ized appreciation were recognized and such values proved overstated, the resulting accounting for the loss in value might be in- equitable for the partners. The bonus method avoids this potential inequity by electing not to recognize such appreciation. 2. The first step would be to determine the fair value of the net assets of the original partner- ship. This would include a valuation of existing net assets as well as the recognition that there may be other net values that are not captured on the financial statements. For example, there may be a contingent liability or goodwill that has not been recognized. Once the fair value of the net assets (e.g., $400,000) has been determined, this amount would represent the percentage interest in the new partnership to be retained by the original partners (e.g., 80%). Dividing the fair value by the percentage in- terest retained results in a suggested value of the new partnership entity ($400,000 divided by 80% = $500,000). The suggested value of the acquired interest is the difference between the value of the new partnership and that of the ori- ginal partnership ($500,000 versus $400,000). 3. Several guidelines govern the process of liquid- ating a partnership. First, all assets and liabilit- ies of the partnership should be identified, and the assets should be converted into a distribut- able form. Second, as assets become available for distribution, the order of priority as estab- lished by the Uniform Partnership Act should be followed. A practical exception to this priority in- volves the doctrine of right of offset. Third, every attempt should be made to secure net personal assets from those partners that have deficit capital balances. Finally, of critical im- portance is the guideline that distributions to parties should not be premature. That is to say, all distributions should be based on the conser- vative assumptions that remaining assets are worthless and that all partners are personally insolvent. This overly conservative position will ensure that no partner receives a payment before he/she is entitled to it. The use of sched-
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern